As market turbulence persists, mid and small-cap retail investors find themselves caught in the storm, facing the brunt of widespread stock declines within these segments throughout the current quarter. Compared to previous years, retail investors are now more heavily invested in these stocks, heightening their exposure to the ongoing market downturn.
Bloomberg’s recent report reveals a staggering loss of ₹6.6 trillion ($80 billion) in small-cap stocks in less than a fortnight, following heightened concerns raised by regulatory authorities over the overheating nature of this sector. This significant loss underscores the severity of the situation and its impact on retail investors who hold substantial positions in these stocks.
Data compiled by Kotak Institutional Equities further emphasizes the growing presence of retail investors in small and midcap stocks. Over the past four years, their holdings in these indices have seen a notable increase, exacerbating the repercussions of the current market rout.
Offering insights into the dynamics at play, V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlights the persistent issue of excessive valuations in these segments, largely driven by retail investor enthusiasm. Despite longstanding concerns, it wasn’t until the regulatory authority SEBI intervened with a firm message that a correction was initiated in the Nifty Small cap index, marking a 10 percent decline from its peak on February 8th. This regulatory action underscores the gravity of the situation and its potential long-term implications for retail investors navigating the volatile market landscape.
Are the Good Times Over? Small and Midcap Rally Faces Challenges Amid Market Volatility.
After enjoying a prolonged period of success, investors in small and midcap stocks may be facing uncertainty as market conditions shift. Recent years have seen these segments deliver substantial returns, with a notable 61% of midcap and 63% of small-cap stocks yielding over 30% returns in the past year alone.
Kotak analysts suggest that the allure of high returns over the past few years may have encouraged increased direct and indirect participation in mid and small-cap stocks. However, despite recent corrections of 5% in the NSE Midcap 100 and 10% in the Nifty Smallcap 100, their one-year performance remains robust, up by 53% and 58%, respectively.
Nevertheless, the recent market upheaval has cast doubt on the sustainability of this upward trend. In a recent crash, numerous small-cap stocks hit lower circuits, and a significant portion of stocks recorded negative returns in the past month. This turbulence suggests that the drivers behind the bull run may now be facing significant headwinds, prompting concerns about the future trajectory of small and midcap stocks in the market.
Retail Investors Flock to Small and Midcap Stocks Amidst Market Frenzy
Last year’s relentless market rally has attracted a surge of retail investors to small and midcap segments, despite the inherent risks involved. Recent data from Kotak Institutional Equities indicates a notable increase in the proportion of small and midcap stocks held by retail investors compared to large caps, particularly over the past four years.
According to Kotak’s report, retail investors have demonstrated a more optimistic stance towards small-cap stocks, actively participating in the rally and thus exposing themselves to the ongoing market correction.
Furthermore, a significant portion of mid and small-cap stocks has surpassed their consensus estimates, driving their valuations to lofty levels. Kotak suggests that many of these stocks are now trading at expensive valuations, particularly when considering their business models and historical performance.
Here’s a breakdown of retail and FPI holdings across various indices:
- NSE 100:
- Retail: March 2019 – 7.5%, December 2023 – 7.9%
- FPIs: March 2019 – 24%, December 2023 – 23.3%
- NSE MIDCAP 100:
- Retail: March 2019 – 8.4%, December 2023 – 9.5%
- FPIs: March 2019 – 19.2%, December 2023 – 15.5%
- NSE SMALLCAP 100:
- Retail: March 2019 – 12.5%, December 2023 – 15.4%
- FPIs: March 2019 – 13.9%, December 2023 – 12.1%
Interestingly, the strategy of retail investors contrasts with that of foreign portfolio investors (FPIs). While FPIs hold a larger proportion of large-cap stocks and have gradually reduced their exposure to small and midcaps over the years, retail investors have increased their holdings in these segments, particularly in small-cap stocks.
Amid Market Fluctuations, Experts Find Silver Linings and Investment Opportunities.
In the midst of recent market turbulence, experts offer insights into the resilience observed within the Nifty index, which has shown relatively minor adjustments compared to more pronounced declines in the smallcap and midcap indices. According to Dr. Vijayakumar, while the smallcap index has experienced a downturn of 13.5% from its peak and the midcap index is down 6.8%, the Nifty has remained relatively stable with a modest 2.1% decrease.
Despite expectations of further corrections in the broader markets, experts maintain an optimistic outlook, identifying silver linings and potential investment opportunities. They point to the underlying strength of India’s macroeconomic fundamentals, which continue to provide a solid foundation for growth. This sentiment is reinforced by Fitch Ratings’ recent upward revision of GDP growth forecasts for FY24 and FY25, now projected at 7.8% and 7% respectively. Fitch attributes this optimism to anticipated strong expansion in the Indian economy, driven primarily by robust domestic demand, especially in investment, alongside sustained levels of business and consumer confidence.
Dr. Vijayakumar underscores the notion that market turbulence presents opportunities for strategic investment decisions. He suggests a shift towards a more discerning approach, focusing on rational valuations and quality investments. Specifically, he recommends exploring opportunities within high-quality private sector banks and leading companies in sectors such as capital goods, telecom, and autos. He advises investors to methodically accumulate positions in these sectors, anticipating a shift away from irrational exuberance towards a focus on rationality and quality in the market landscape.
Disclaimer: The opinions and investment insights provided are intended solely for informational purposes and should not be construed as financial advice. Bystox.in strongly advises users to consult certified financial experts or professionals before making any investment decisions. We emphasize the importance of conducting thorough research and seeking personalized guidance tailored to individual financial goals and circumstances. Please be aware that investing involves inherent risks, and past performance is not indicative of future results. Bystox.in does not assume any responsibility or liability for the accuracy, completeness, or reliability of the information provided. Users are encouraged to exercise caution and diligence in their investment endeavors. Remember, your financial well-being is paramount, and seeking expert advice is highly recommended.